Some idle thoughts as equity investors line their pockets. A genuine liquidity issue?


UPDATE: This graphic and text (in addition to comment 1 below) sets out the difference in perspective and expertise on interest rate derivitives between the essentially equity focussed bean counting (cum archair economist) scribe and a quant who trades the instruments and looks to lock down a return no matter what rate permutation the Fed adopts.

TRADEABLE SYNTHETIC BASIS CHART ENCLOSED....


DEC EURO'S.. THEY GO UP CAUSE THE FED WILL EASE..
OR THEY GO UP CAUSE THE "BASIS" WILL NARROW... TWO OPTIONS FOR THE PRICE OF ONE!

FFF8 1/31/2008 50 0.0467 ASSUMING NO OCT AND 32% PROB OF DEC..
FFG8 3/12/2008 42 0.0467 THIS IS WHERE JAN AND FEB FUNDS ARE..

WITH A LITTLE COMPOUNDING =>'S 4.68%
DEC EURO'S WHICH ARE OF COURSE WHERE T THREE MONTH LIBOR IS ANTICIPATED
TO TRADE... 94.05.. OR 4.95%

A) COMPARING FUTURES TO FUTURES ELIMINATES MOST OF THE CASH/FUTURES BIAS..
BOTH ARE JUST EXCHANGES FOR DIFFERENCES.. NO REAL MONEY EXCHANGES..

C) THREE MOVING PARTS.. DEC EUROS.. PROBABILTY OF FED MOVING AND "SPREAD"
GIVEN THE FED ON HOLD DEC EURO'S NOW IMPLY THAT THE SPREAD
WILL BE 20 BASIS POINTS.. TO BE CONSISTENT WITH 95.04 FUTURES
PRICE..

B) FFF8 1/31/2008 50 0.0475 FED DONE...
FFG8 3/12/2008 42 0.0475
DEC EURO'S AT 95.04 IMPLY 20 SPREAD!!!
TO FED FUNDS BETWEEN DECEMBER AND MARCH..

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3 comments

  1. phyronc@gmail.com // 10/12/2007 08:49:00 PM

    I hope that you are aware that the chart that you are showing is totally meaningless... and is not what "professionals" refer to when they talk about the spread between fed funds and libor..

    That spread has been "collapsing" in the last days.. in by almost 25 basis points...

    What you should be looking at. and what is relevant is the spread between Three Month Libor.. and the expected rate on FED FUNDS for the next three months...

    That spread is now collapsing... if you'd like email me at phyronic@gmail.com and I'll send you some pretty charts.. so you can at least keep trac of what's what..

  2. RJH Adams // 10/13/2007 11:03:00 AM

    History totally meaningless vs expectations?

    Email en route; pretty charts or other, quant insight welcome.

  3. Charles Butler // 10/16/2007 02:28:00 PM

    Take a couple of weeks off and return to find some stuff poking around historical maxima, as you say. Still remain unconvinced (with the exception of the NASDAQ), though. It's more than coincidence that the various 'ugly market' spreads possible in my sandbox continue to outperform the index despite its apparent - and thinly patronized - bouyancy.

    Would have needed another few days to get over that far, BTW. I did, however, get to watch les blacks piss it up at a local watering hole in Brittany, slowly easing myself to the back of the room at the 77 minute mark. I'd already been elbowed in the head twice by the painred up little kid beside me.

    Cheers,

    C

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